September 3, 2015

September 3, 2015 Time To Base-build Last week's review suggested watching the Euro and the Yen to assess if the unwinding of the carry-trade was indeed over between Monday's and Wednesday's declines. We have seen the currencies return to a normal level and trading calm down, suggesting that the "cover the currency, sell stocks" trade was over. The indiscriminate nature of the selling is an indication that this was an automated trade that lacked any thought. Unfortunately, the rise of the computers revealed vulnerable trades. Placing "stop-loss" orders without limits opened the door to abuse. Many prints, though real, were so far out of the range that we believed that the lows seen last Monday would not be seen again in a test. Still, we did test. China is still in turmoil, although the government has helped stabilize their markets for the moment. Their economy is another question, but remember that it is a highly manipulated economy and market. There will be damage, especially to Asian partners, and to Europe. It will be less so to the US, with the exception of those companies that have bet heavily on China in their expansion plans. Large cap multinationals and commodities remain volatile and vulnerable. Monday was the last trading day of the month and we did see selling pressure, as anticipated. Tuesday, a new trading opportunity, aided by more bad economic news from China, initiated the technical "test" of the prior week's low. Our targets for the Dow (16,000) and S & P (1910) were slightly undercut intra-day. The NASDAQ held well above the 45000 target, but that should be seen as a positive sign. Less liquid secondary stocks were less tempted to revisit recent lows. This was the "test". Friday, we get two key data points, the August Employment Report and the University of Michigan Sentiment Survey. The latter will be released at 10 am EST and is expected to slip to 92.9 from 93.1. However, this survey will have been impacted by the Dow's 1000 point decline. How the general sentiment holds up will be very telling. Fed President Dudley mentioned this report, so traders will watch it more closely than at other times. August jobs are expected to see an increase of 213,000 and the unemployment rates is expected to dip to 5.2% from 5.3%. Average hourly earnings are expected to remain steady with an increase of 0.2%. In general, a number under 200,000 is expected to give the Fed cause to leave rates alone. With Mario Draghi's comments that more QE could be enacted if the economy weakens, it is pressure on the Fed that they be fearful of overblown economic growth (highly unlikely) or inflation (also unlikely). Therefore, the Fed needs a big number in order to move, at lease 240,000. The market still fears the aftermath of a rate hike, no matter how small. It is simply not well priced in, especially to the long-end yields. A short-rate increase would flatten the yield curve and act to slow the economy, although marginally. Getting strong consumer spending data into December would counter the negatives of a higher rate, if the Fed chooses to wait. To be clear, we do expect the consumer to be a positive influence on economic growth due to low unemployment and lower gasoline prices. The negative for the Fed waiting is that it kicks the can of inevitability down the road. In some sense, it would be better to just get it done. However, the market remains vulnerable, and I believe the Fed will err to the side of caution. Technically, we've got great data points for the short term. The "intervening high" from last week is the buy trigger short-term. Those levels are Dow 16,667, S & P 1994, and NASDAQ 4837. The targets would be Dow 17,125, S & P 2044, and NASDAQ 4900. The downside would be to challenge and slightly undercut Tuesday's lows: Dow 15,980 , S & P 1903, and NASDAQ 4615. I don't believe we would break last week's lows, but this Tuesday's low would be closely challenged on a high jobs number. We've talked about September being a tough month. For many hedge funds, its the end of their fiscal year. Octobers are know for making lows, but only because those years see selling pressure in September. While at our lowest levels since February, the Dow is down year-over-year, the S & P is flat, and the NASDAQ is up. It remains a mixed picture with the big multi-nationals being the drag and the smaller, domestic oriented businesses doing better. We need to "survive" September and then I believe we will have a base to work with for a year-end rally.
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